Feb 6, 2020
Yes, my cliff-hanger was even longer than the latest break in TWD - and I still want to know where on earth Rick is!! You all have my humblest apologies and I promise to make it up to you with a plethora of regular self-deprecating insights into things in the finance world that are normally boring and dry, but that we all need to know.
So, in our last episode, we spoke about the villain, "Recession," with his dark gloomy cloak, "inevitability," but now it’s time to introduce the hero of our story, "Opportunity." We have seen a lot of Marvel superheroes over the last few years. While Peter Quill (aka Star Lord) is hands down my favourite, my real-life favourite superhero, as you all know, is Warren Buffett – aka The Oracle of Omaha (you know you are cool when you get a sweet superhero identity!!).
There is no better way to start this cheat sheet than quoting the guy who wrote the book on making it rich in a downturn:
“A simple rule dictates my buying: be fearful when others are greedy, and be greedy when others are fearful.” – Warren Buffett
Warren has shown us time and again that this paradigm works. The GFC was a great example: he was buying up while others were jumping out.
Before I show you how to become rich with the cash that you have, let me give the small business owners some tips on how to, not only keep your business in a downturn, but turn that business into a monster.
Let’s assume that you have not taken this Fox's advice to date and you are not recession ready. You are probably sitting at your desk, looking at last month’s financial report. You see a significant drop in customers and you have just had that "oh crap" moment where you realise a she'll-be-right attitude will not pull you through the inevitable full economic downturn.
Firstly, take comfort in the fact that at least 80% of your competitors are probably having that same gut-churning sensation as that animal instinct kicks in: fight, flight or ignore. I have added this last one, the all-too-human response of pulling the covers up over your head and wait until the villains have been chased away. Historical recessions are full of the last two, the ones who run away and the ones who close their eyes and hope it all works out.
The issue that you have is that the overall pie is getting smaller, and the game has become hanging on to your piece of the pie. In this instance, you go into survival mode and start to shore up the business. You call in all your accounts, you pay up all your bills, you look at cutting costs and you ride it out. You treat your customer base like gold. This is absolutely the safe option.
What I see here is an opportunity. The customer pie is now small and people are trying to save money wherever they can; however, just because we are in a recession does not mean all industry has stopped. There is still a huge amount of business out there. While there are probably less new entrants, all those established businesses still need services. This is the time to start stealing as many customers as you can from your competitors! The pie may have shrunk in relation to easy clients, but that does not mean that you cannot take a bigger piece of the pie.
So, let’s review the facts. People still need services, but everyone is tightening their belts to save some money. Your competitors are now spending less money on their marketing, advertising and sales. If we follow Warren’s (and my!) advice, this tells us it’s time to expand!!
Let us assume that you do not have a smaug pile of gold stashed away or large wads of cash stashed under your mattress. So lets see how we can bare bones this. Firstly, it’s all about the cost – slash your prices. You already know that everyone is worried about costs so make that your market advantage. Bring your prices down so you are covering your own costs plus a margin of 10% or 20%. Really shock the market. I never said you were going to enjoy this, but a little bit of pain now for a lot of success later is worth it. It’s all about numbers. You want to steal as many customers from your competitors in this period of uncertainty as possible. If you can get significant growth in your overall customer base, your overall profits will keep you comfortable.
Secondly, it’s all about service. You want your clients to feel like royalty (this holds true irrespective of economic outlook). Yes, you are making peanuts off them for now, but it’s your service that is going to keep them after you bring your prices back up once the market starts to turn.
Spend money on marketing and advertising and hire more staff if you need them (however, this is also the time when you swallow your pride and get back in the trenches with the troops – get knocking on those doors). Also, do not forget domestic slavery, a tried and true method of growing every small business. Get your family in there: kids, parents, grandparents, puppies… pay in love, gratitude and promises of a better tomorrow. You could also threaten to take away their iPads and Netflix subscriptions.
This might sound like a risky approach, but take a look at a guy who followed this method religiously, Jeff Bezos aka the Billion-dollar man (I made that up as he does not have a super hero name yet. “your welcome Jeff”). Jeff did this so well that he is now the richest man in the world. Solid effort!
Okay, for all those kids who did listen to my advice and have been consolidating cash, it is time to dig up the backyard and unstuff that mattress.
This is where our hero, Opportunity, comes in. There are winners and losers in every game. Make no mistake, investing is only a game, the way we keep score is how much money we have. This is as easy as keeping your peepers open – Opportunity isn’t a hide-in-the-shadows kind of superhero. He will not only knock on your door during a recession; he’ll stroll down main street, clanging a giant bell, wearing an outfit that would make a drag queen speechless.
The trick here, guys, is educating yourselves. You need to network and you need to ask questions. A lot of questions. If you are serious about investing you should be spending at least 30 minutes to one hour everyday googling and being curious. See what is happening in the world, read the news, look at investing companies globally etc.. So the low-hanging fruit will be real estate with people getting out fast: mortgagee sales and shares in solid companies that are at a discount from falling prices. But let’s face it, Samsung is still going to be Samsung the day after the recession stops. Only the desperate, uneducated and fools sell solid shares when prices are low. But this is not news; anyone can work it out. To be honest with you, it’s a mug's game. There are better places you can put your cash to get far greater returns.
The real opportunity in a recession is the desperate need for cash. You have people who need to save their properties and people who need to save their businesses. Instead of buying these at a discount when they lose them, why not lend these people some money so they can keep their assets. Now, I am not talking from the kindness of your heart. All the Foxes here are capitalists by nature, but that does not mean we are Vampires. You can offer funds to these companies and assets to get them out of hot water and patch them through until the economy turns around. For this, you would want a fixed interest rate that you will probably capitalise for repayment at the end of the loan and you want a good piece of equity in the business or asset (30% is a good starting point). People are very happy to give away equity when it means they get to keep their business. Everyone is a winner here. We might not be Vampires, but we sure are Foxes 😉.
I have said it before, the best way to secure your financial freedom is to own a small piece of as many income-producing assets as possible. Multiple investment properties is also a mug’s game; multiple businesses that produce money is the winning ticket (and as many of those as you can because they don’t all work out). If you need an example of this working, just look at my favourite superhero, Warren Buffett, a man who could still be the richest guy in the world if he was not so awesomely benevolent in giving away $46 billion since 2000!
That, friends, is the cheat sheet for making the best of a recession.
I would like to make a side note: Yes, we are capitalist, yes, we enjoy the hunt for success, but let us not forget to give back and to grow our communities. I would like to give a quick shout out to bees (yes, our little black and yellow friends who are busy everyday making us delicious delicious honey) – without these little guys none of us would bee here 😉. But seriously, these little guys are in trouble. Please take a moment to google them and see what you can do to help.
Thank you everyone (58 people read my previous post at last count; I almost feel like an under-minor celebrity. Haha). I hope you enjoy and please feel free to shoot me any questions or topics you’d like me to cover and you can follow me on my instagram @shaunfox_raic